Crossoads (Toward Philippine economic and social progress)
Philippine Star, 18 December 2012


A recent electric shock jolted all customers of the Meralco franchise area. Their bills would rise by P4.15 per kilowatt-hour of consumption. Such an increase in charges represents the purchases of Meralco from the spot market that it can pass on to customers as allowed by the regulations.

Now, the normal electric bills that we pay are already among the highest electricity rates in East Asia. Thus, when Meralco’s surprise additions are added to our electric bill rates, we have a truly high cost of electricity.

The spot market purchases represented electricity supply obtained when the Malampaya gas fields underwent a maintenance shutdown during a month’s recent period in November and December. Three independent power suppliers that directly use Malampaya gas as feed were affected. In turn, these plants provide 40 percent of power produced in Luzon.

Unusual public anger over unexpected charges. Extensive public anger has been expressed concerning the unexpected increase in their electricity bills. Congress immediately called a public hearing to find out what happened. Subsequent public commentary continues by the day.

The Meralco and the DOE (Department of Energy) explained the immediate facts of the case. What did not escape notice was that the original projection of P1.58 per kilowatt hour of additional cost burden became P4.15 per kilowatt hour, or 2.7 times larger than the original estimate.

Why the price hikes? Questions and speculations about the management of the electricity industry have never been more intense in recent times. The Malampaya maintenance shutdown had been scheduled long before. This meant that DOE and ERC (Energy Regulatory Commission) had knowledge of it as early as 2012 if they were doing their job.

Headline grabbing attention is accorded to the mention of “collusion” among some power producers in this incident. It turned out that, in addition to the three power producers that depend on Malampaya gas, three other power producers with supply contracts with Meralco also scheduled their own shutdowns. As a result, Meralco had to buy more electricity from the spot market than anticipated to cover for the undelivered contracted power supply.

Others observers simply made the charge – and here the PCCI (Philippine Chamber of Commerce and Industry) is ahead of the list – that the government “slept on its job” of protecting the interest of power users.

They asked, why did the government not install measures to protect electricity users from the expected outages? The spot price in the WESM (wholesale electricity spot market) could be influenced by the market players in many ways.

The nature of the electricity market under EPIRA. The electricity market of independent power producers is regulated. The electricity plant suppliers could be any number of power generators as are approved to operate by the Department of Energy (DOE). This number depends on the country’s electric power needs.

Under the EPIRA (Electric Power Industry Reform Act, Republic Act 9136, passed in 2001), the electric power industry is a regulated industry of private sector-owned electricity suppliers, the IPPs (independent power plants).

The retail distribution franchise (in this case, Meralco) buys contracted power from the IPPs. The franchise is regulated by the Energy Regulatory Commission (ERC). The electric power rates charged by the franchise are approved by the ERC.

The spot market. A component of the regulated industry is a market driven “wholesale electricity spot market,” the WESM. This is the spot market where free electricity supply could be sold to those in need depending on supply and demand conditions of the moment.

WESM has been in operation for at least five years now. Its life depends on the nature of free power supply that could be sold by the IPPs to the spot market. Evidently, it depends on the national electricity capacity and the growth of a market for wholesale electricity that could be developed among bulk buyers of energy.

Privatization of NPC’s assets. Under EPIRA, the various generation assets of the National Power Corporation (NPC) were sold to the private sector. The motivation of this move was in part to relieve the government of fiscal burdens imposed by ownership of these assets. But the major part of it was to jumpstart the private ownership of the electricity industry.

The privatization of the bulk of NPCs electricity generation assets were sold during the watch of Gloria Macapagal Arroyo. An outcome of this privatization program is that major industrial groups that are dominant in the Philippine economy became also dominant in the electric power industry.

A consequence is that names familiar in the domestic economy whose enterprises dominate the industrial, commercial, financial and other public utility operators now also own the power generating plants of the electric power industry.

The list of these business groups is familiar: San Miguel Corporation, Henry Sy’s SM group, the Lopez group, the Aboitizies power group, Gokongwei’s Summit group, the Pangilinan group, and other industrial players already well-known in the country. Except for the Aboitiz and Lopez groups, none of these business groups were in the power industry a decade earlier.

The only substantial business groups missing in this list are the Ayalas and Lucio Tan. However, Ayala has recently announced that it will invest in power assets. The Ayala group has been among the earliest privatizing operators – in water distribution utilities. Lucio Tan, until recently, had been immersed in the control of the Philippine Air Lines.

Total generating power capacity. A major feature and shortcoming of the electric power industry setup today is this. The total generating power capacity in the nation has hardly changed since the EPIRA was enacted. This is a major failing of the government.

The installed capacity for electric power has not increased much ever since the industry expanded under former President Fidel Ramos to solve the electricity crisis of his time.

Recent economic growth over time has led to the diminution of the excess capacity. The privatization of the industry might have firmed up the reserve capacity of the nation by staying the rapid depreciation of the existing power assets.

But power capacity has to increase if high growth can be sustained unimpeded and in part to prevent episodes of spikes in electricity rates due to tightness of capacity.

(My discussion of labor policy reforms is postponed to next week.)